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Sonat Deal Cuts Rates, Locks in Contracts, Folds in South Georgia

Southern Natural Gas closed a major deal with its customers last
week that will give them a $44 million rate cut in exchange for
long-term contracts that lock up the majority of Sonat's firm
transportation and storage capacity through 2005. The rate cut
amounts to an overall 4.5%-5% reduction in systemwide demand
charges.

"With the contract extensions we felt we could take more risk in
achieving cost reductions," said Jim Cleary, Sonat's executive vice
president. "The rates that we had proposed to be effective March 1,
would have resulted in.probably close to a $29 million increase
from the settlement rates that were in effect for all parties
through February --- the rates established under the March 1995
settlement," he said. "Through this settlement we are avoiding that
$29 million increase and taking the settlement rates close to $15
million below the rates that were in effect in February. So you
have a swing of $44 million."

According to Cleary, major changes were made in several areas:
there was a $10 million decrease from Sonat accepting a 12% return
on equity as opposed to the 13% sought in August; there was a $14
million depreciation reduction; $10 million was cut from
administrative and general expenses; and another $10 million came
from operating cost reductions.

The deal includes significant cuts for affiliate South Georgia
Gas customers. Southern plans to swallow South Georgia's pipeline
operations to eliminate rate stacking with its affiliate. South
Georgia, a separate 910-mile interstate pipeline, will be merged
into the Southern Natural system following FERC authorization.

"The customers on South Georgia wanted lower rates. Merging
South Georgia into Southern Natural is a way to do that," said
Cleary. "Currently customers on the South Georgia segment pay
$5.41/Dth/month. That will go down to $4.75. Currently on Southern
Natural, they pay $8.62 so they pay $14.03 in combined demand
charges currently, but that will go down to $12.85/Dth/month.

"We think all of the active parties to the settlement are in
agreement," said Cleary. "Customers representing over 95% of our
revenues have told us affirmatively that they would support the
settlement. We may have one small marketer protest it. This
marketer probably represents probably less than one half of 1% of
our revenues." He declined to name the marketer, however, saying,
"We are still in discussions with them so I would prefer not to do
that."

The $103 million North Alabama Pipeline, which went 50% over
budget, is rolled into rates, but other expansion projects and cost
reductions led to the systemwide rate improvement. "It's a very
positive development for Southern and its customers, who will see
immediate rate reductions and stable rates for the next four years
at least." The settlement provides Sonat customers a four-year
moratorium on future rate increases by Southern Natural except in
certain limited circumstances. It also requires Southern Natural to
file a new rate case with the FERC to be effective no later than
March 2005.

Through the settlement, Sonat has locked in contracts for a
majority of its 2.6 Bcf/d of firm transportation capacity and 60
Bcf of working storage through 2005.

"We are pleased to have been able to achieve an acceptable
commercial resolution with our customers that settles our rate
proceeding and provides for immediate rate reductions and
significant extensions of contracts," said James C. Yardley,
president of Southern Natural.

Rocco Canonica

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reserved. The preceding news report may not be republished or
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